Half Moon Bay faces a financial crisis involving a property dispute with a property called Beachwood, which is bordered by Terrace Ave. to the south, Hwy. 1 to the west, Grandview Bl. to the north, and the Pacific Ridge development to the east. These pictures were made on December 14, 2007, in Half Moon Bay, CA.

The State Assembly could vote as soon as today on a bailout for the city of Half Moon Bay, which faces an August deadline to pay a developer $18 million resulting from a lawsuit over a plot of land slated for housing that the city inadvertently turned into wetlands.

The Assembly will decide whether the state should loan Half Moon Bay $10 million - interest-free - to pay much of the negotiated settlement, which followed a judge's November 2007 ruling that the city owed a Palo Alto developer $41 million. The Legislature considered various bills to assist Half Moon Bay last year, but none was successful.

The fate of this bill is not certain, as another version of the legislation stalled in the Senate, and the state is grappling with a huge deficit. The $10 million loan would be paid out of four special state funds, none of which are part of the general fund that has a $24.3 billion deficit.

Half Moon Bay isn't the only municipality facing financial difficulties. Cities across the state are imposing drastic cuts due to deficits, and one in the Bay Area, Vallejo, has filed for bankruptcy.

"The fear and concern for me and the state is a potential bankruptcy not due to financial mismanagement, but due to a lawsuit that created a unique situation for Half Moon Bay," said Assemblyman Jerry Hill, D-San Mateo, who introduced the legislation.

He said a bankruptcy would put San Mateo County in the difficult position of providing public services for the community.

If the city is unable to get money from the state, it will seek to purchase bonds that would cost the city $1.3 million per year for 30 years to pay back, or about 12 percent of the city's general fund, said Michael Dolder, interim city manager. He said legal advisers have told city officials that they probably would not qualify for bankruptcy protection.

And, if Half Moon Bay misses the August deadline, it would owe back interest on the settlement of 6 percent dating from 2007.Half Moon Bay laid off 19 workers in March to put it in a better financial position to seek and pay for a bond, Dolder said. The city now employs 36 workers.

If the state approves the $10 million, the remaining $8 million would come from local and county sources, and the city would use the money to buy back the land.

The legal dispute over the 24-acre Beachwood property, near the intersection of Highway 1 and Highway 92, traces back 33 years, when the city approved a tentative map for a residential development on the property.

In 1983, a city-built storm runoff system was placed on the property in advance of construction. But a city contractor piled dirt on the property that resulted in the pooled water that the court would later say was largely city-created wetlands, according to the November 2007 ruling.

Developer Charles Keenan III bought the land for $1 million through a trustee in a 1993 foreclosure sale. In addition, Keenan contributed nearly $1 million for a sewage plant that the city said was necessary before development could begin. But in 2000, city leaders decided that protected wetlands were now present on the property, arguing they had appeared naturally.

State law prohibits development on wetlands in the coastal zone, which includes all of Half Moon Bay, and the city would need state action to allow it. Keenan declined to comment.

The city would have 20 years to pay back the interest-free loan, with the first payment due five years after Half Moon Bay receives its first payment.

Once the city buys the land, officials would convert the portions not deemed wetland into a park.

Sen. Leland Yee, D-San Francisco, introduced a similar bill in the Senate, but the proposal has languished in committee because of objections to how the state would provide the loan. Hill amended the Assembly legislation to provide different funding sources.

Yee opposed a bill in the Legislature last year to allow the land to be developed and said the bailout is necessary to avoid that.

"If the public policy of the state Legislature of California is we feel the coastline is important, ... then we ought to find ways to say to Half Moon Bay that you don't have to develop the coastline - you have another option," Yee said.

Legislators have split on partisan lines, with Democrats favoring the proposal and Republicans opposing, in two committee votes so far.